Microsoft announced on Monday that it would eliminate approximately 4,800 roles, or 2.1% of its global workforce, triggering a 1.5% drop in its share price in early trading and deepening a first-half decline of nearly 23% — the worst such performance since 2022. The cuts fall most heavily on the Xbox gaming division, which will shed around 3,200 positions over the coming fiscal year, including 1,600 immediate layoffs, and divest or spin off four game development studios. The restructuring arrives as the company’s capital spending on artificial intelligence infrastructure is projected to reach $190 billion in 2026, squeezing cash flows even as Azure cloud revenue benefits from AI demand.

The mechanism behind the cuts reflects a dual pressure: the soaring cost of building AI data centres and a gaming unit that new Xbox CEO Asha Sharma described as operating at margins “3–10x lower than comparable platform and publishing businesses.” In a memo to staff, Sharma said the division had bet on subscription service Game Pass and multi-platform releases, but those bets “did not grow at the pace we expected,” while the core console business weakened and the industry entered what she called “the most severe hardware crisis in its history.” The company had earlier offered voluntary buyouts to about 9,000 US employees, with more than 30% accepting, which partially reduced the scale of involuntary cuts.

Xbox will transfer Compulsion Games and Double Fine Productions to independent management, while Ninja Theory and Undead Labs are to join new owners; Arkane Studios in France begins consultations with its works council over strategic options. The gaming division’s overhaul is the most significant in its history and follows years of heavy investment, including the $68.7 billion acquisition of Activision Blizzard. Microsoft’s chief people officer, Amy Coleman, told employees that the eliminated roles are “not being replaced by AI,” though she acknowledged that AI is reshaping how work is done. The layoffs form part of a broader tech-industry trend: Amazon and Meta have also cut thousands of jobs this year as companies redirect resources toward AI infrastructure, with sector-wide AI outlays expected to surpass $700 billion in 2026.

Microsoft typically adjusts headcount near the end of its fiscal year in June, and the company signalled that further changes are likely across other business units. The next factual milestone is the release of Microsoft’s quarterly financial results later this month, which will offer the first official look at how the restructuring and AI spending are affecting profitability. The Xbox unit, under Sharma’s leadership, aims to return to growth by 2027, but the immediate focus remains on executing the studio divestitures and absorbing the workforce reduction across commercial and gaming operations.